Tuesday’s Republican victories in the U.S. Senate are inspiring strong optimism among medical-device companies in Minnesota and nationwide for a repeal of the 2.3 percent tax on their products.
But repealing the unpopular medical-device tax will not be easy, even with Republican majorities in the House and Senate. Any stand-alone device-tax bill would face a likely veto threat by President Barack Obama, which means repeal is more likely to be a part of a broader bill reforming business taxes or the Affordable Care Act.
“I certainly hope Congress and the White House choose to work together and look at the reform law and in particular the device tax,” said Shaye Mandle, Chief Executive of Minnesota’s devicemaker interest group, LifeScience Alley. “We are hopeful.”
The four-year-old Affordable Care Act has never been overwhelmingly popular with Americans, but the provision imposing a special tax on devices to fund the overall operation of the law has been the target of criticism from Republicans and Democrats alike. Minnesota’s Democrat senators have both supported suspending the tax, and the leaders of the new Republican majority in the Senate have long wanted to repeal it.
Supporters say the billions of dollars generated by the tax on devices are needed to pay for the effort to overhaul the U.S. health-care system. Critics say it imposes higher costs on consumers and device companies alike, and hampers American companies’ ability to innovate.
The Internal Revenue Service began collecting the tax in 2013, and it did not send the industry into a financial nose-dive.
The nation’s medical-technology companies recorded $16.5 billion in income on $336 billion in revenue in 2013, according to a report published last month by Ernst & Young. The income figure grew by 16 percent compared to 2012, even though revenue grew only 4 percent in that time. But study authors urged caution when interpreting the numbers.
“On the surface, the double-digit percentage growth in net income is a welcome change from the 24 percent decrease in net income that took place from 2011 to 2012,” the report says. “However, the picture changes when one realizes 2013’s net income growth was boosted by a series of charges incurred by Boston Scientific in 2012. Normalizing for these charges, net income actually fell by 2.6 percent.”
Money spent by medtech companies on Research and Development grew by 7 percent between 2012 and 2013, the report says.
The financial performance did nothing to tamp down bipartisan interest in repealing the tax, which spiked when the collections began in 2013.
Although Democrats have staunchly resisted attempts to change or repeal the Affordable Care Act as a whole, some members have broken with Obama to support repealing the device tax, particularly Minnesota Sen. Amy Klobuchar, whose state is home to one of the nation’s hotbeds of medtech companies and jobs.
Klobuchar this year offered an amendment to a bill that would have suspended collection of the tax for two years, but then-Sen. Majority Leader Harry Reid refused to allow inclusion of the measure. Sen. Al Franken, a Democrat who was re-elected Tuesday, also supported the suspension.
Now both senators will enter a legislative chamber run by Republicans who have been openly hostile to the law as a whole and the tax in particular.
“Incoming Senate Majority Leader (Mitch) McConnell, R-Ky., has been a vocal supporter of the need to repeal the device tax and is joined by Senators across the political spectrum who believe repealing this onerous tax is the right thing to do for job creation, economic growth and patients everywhere,” Steve Ubl, Chief Executive of Washington-based interest group AdvaMed, said in an e-mailed statement Wednesday morning.
The president is likely to veto any stand-alone bill to repeal the tax, and it’s not clear enough Democrats in the Senate would break with party line and vote to override him.
That’s why critics of the tax see their goal as more likely to happen in the context of a bipartisan bill to reform either the U.S. tax code or the reform law.
“There are plenty of provisions of the ACA that both Democrats and Republicans don’t like, and clearly the American public doesn’t like, judging by last night’s results,” said LifeScience Alley’s Mandle.